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Sunday, July 14, 2013

The Sunday Times : HDB coffee shops are not District 10 bungalows

The Sunday TimesBy Han Fook Kwang, Managing Editor14th July 2013They were built by the HDB to serve residents on state land acquired for a public purpose

Here's a $23.8 million question about Singapore's most expensive coffee shop, in Hougang: How come I can still buy a cup of kopi-o there for 90 cents?

The simple answer is that, disregarding the price of the property, what goes into making that cup of coffee didn't cost much - especially not the wages of coffee shop assistants.

They are likely to belong to the bottom 20 per cent of income earners, whose incomes have stagnated over the years.

Mean-spirited though it might be, it's their meagre earnings you have to thank for your cheap beverage.

If they were paid more, like workers in Japan or Switzerland, for example, you can bet your last teh kosong that you will have to pay a lot more.

That 90-cent coffee represents one part of Singapore, perhaps the part that many of us are fond of even if we would rather not have our livelihood depend on it.

The $23 million Housing Board coffee shop, however, is another story altogether and might as well belong to a different world.

What goes into making up the sky-high price and how did it reach such a level?

When The Straits Times spoke to people in the property business last week, they cited one possible reason: the prospect of capital appreciation of the shop, which means it might sell for an even higher price in future.

If those experts are right, the buyer was prepared to pay the record price not because it made business sense in the running of a coffee shop, but because it was a good property buy which he could hope to profit from at some later date.

Stallholders in the shop were quoted as being understandably concerned that the new owner might raise rents. Patrons were in turn worried about having to pay more for food and drinks.

Alas, the two worlds do collide, and when a $23m deal spills over to a 90 cents cup of coffee, you know what the outcome is likely to be.

But should the price of a cup of coffee be tied to the ups and downs of the property market?

Can't Singaporeans have their kopi without worrying about the next multimillion-dollar deal?

The reality is that in this land- scarce, market-driven country, almost everything is affected by the high price of land and property.

It's a lament I often hear from Singaporean bosses complaining about the cost of doing business here, especially rental cost.

A friend who runs an SME says he regrets selling a building he developed for a tidy profit and renting back some of the floors for his own operation.

His rent has gone up considerably over the years, and the profit he made from the sale has not been enough to cover the rising rent. He did not foresee industrial rentals increasing so much and says he knows others with similar stories.

For residential property, rising prices have led the Government to impose no fewer than eight sets of cooling measures since 2009 with only limited success.

It shows how difficult it is to tackle the problem once a property bubble builds up.

In a normally functioning market, the price of a coffee shop property cannot be so high that it would be impossible for the buyer to recoup his outlay from operating the shop.

If Singaporeans are only willing to pay 90 cents for a cup of coffee, it places a limit on how much that coffee shop itself is worth.

But if the shop is viewed more as a property buy and less as a place to sell food and drinks, its price will have more to do with the state of the property market than the price of a cup of coffee.

Eventually, though, that coffee price will have to go up, as is likely to be the case in that $23 million shop.

This is the same worry many people have over the setting up of real estate investment trusts (Reits) which critics say exert pressure on rentals because of the financial returns these instruments are expected to provide for investors.

They have been blamed for ever rising rentals of retail shops in the malls and industrial property.

Should the Government intervene to stop these price increases?

Or are they the result of market forces and best left unregulated?

The trouble is that, contrary to popular belief, the price of land, and hence property, is not decided solely by free market forces here.

In fact, it is mostly determined by the Government because it is the largest landlord and has control over many policies that affect selling prices: how much land it releases for development, the period of the leases it offers, the zoning parameters it draws up, the actual prices of public flats it builds, the restriction on property loans it can impose and so on.

With so much control at its disposal, the Government has a primary responsibility to ensure that prices and rentals do not get out of hand.

Indeed, it recognises and accepts this, which was why it intervened with all those cooling measures.

But it has to be clearer about what exactly is its overall policy regarding these prices.

It isn't at the moment, and this explains why it dithered in the past and did not act as decisively as it should have when prices moved so precipitously.

It has been only recently that it has taken a clearer position on, for example, public flats.

Earlier this year, National Development Minister Khaw Boon Wan said that when pricing new flats, the HDB would set prices on its own instead of pegging them to resale flat prices.

"We should be the price-setter, not be the price-follower... The social objective is to ensure home ownership and affordability," he said.

In practical terms, it meant pricing new flats in non-mature estates at four times the annual median income of applicants, 30 per cent lower than the current 5.5 times.

That's a good start to making it clearer, more transparent and affordable.

What about coffee shops?

For those in housing estates, such as the one in Hougang, there is no reason why they should be bought and sold like bungalows in District 10. They were built by the HDB to serve residents on state land acquired for a public purpose.

If the price of coffee has to go up eventually, Singaporeans would rather the increase went to those shop assistants and stall holders rather than property players out to make a financial killing.

One simple way to ensure these shops keep to their original objective is to require that they be sold back only to the HDB.

Singapore Time

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I have in preparing this information used my best endeavour to ensure that the information contained therein is true and accurate, but accept no responsibility and disclaim all liability in respect of any errors, inaccuracies or misstatements contained herein. Prospective purchasers should make their own inquiries to verify the information contained herein.